Multi family homes are an affordable and flexible housing alternative for many Americans that live in urban environments. There is a high demand for multi family rentals such as duplexes, fourplexes, and apartments. Buying a multi family home can, therefore, be a great investment strategy for making a good return on investment in real estate.
Recent research by the National Real Estate Investor (NREI) revealed that multi family property is one of the most preferred asset classes among high net worth (HNW) individuals. Here are some of the reasons why investing in multi family homes is a great option and why some investors prefer them over single family homes:
- Tax breaks – Owners of multi family homes are entitled to deductions such as depreciation, repairs and maintenance, travel expenses, advertising costs, and interest.
- Easier investment property financing – Though multi family properties typically cost more than single family homes, they are easier to finance. This is because multi family homes have the potential to generate higher cash flow.
- Grow a real estate portfolio fast – Buying a multi family home allows you to build a large portfolio quickly. Acquiring a 15 unit property is much easier than buying 15 separate single family homes.
- Professional property management makes sense – Hiring a property manager to handle the running of your rental properties makes financial sense when you own multi family homes.
- Risk mitigation – Buying a multi family home minimizes the risk of total vacancy. If one tenant leaves, you will still have others to keep your cash flow positive.
- Long-term value – Multi family homes are priced based on their income-generating potential. As a result, they usually enjoy a higher appreciation rate compared to single family homes.
- Less competition – Many real estate investors are intimidated by the idea of purchasing multi family homes. As a result, there is not much competition when it comes to buying and renting multi family homes.
How to Buy a Profitable Multi Family Home
Here are the 5 steps for purchasing high cap rate multi family real estate:
1. Find multi family homes for sale
The first step in buying a multi family home is to research the areas where you would want to invest. According to Mashvisor, some of the best places for buying a multi family home include Chicago, Los Angeles, Baltimore, Detroit, Philadelphia, Cleveland, Miami, and Dallas. You can start looking for profitable neighborhoods in any of these cities to start your search in.
But, how can I find multi family homes for sale near me? You can do this by driving around neighborhoods in your local housing market or working with a real estate agent to find multi family homes for sale.
Wherever you decide to invest in real estate, the idea is to get as much information on the neighborhood as possible before making a purchasing decision. Here is what to look for when choosing a location for buying a multi family home:
- Public parking
- School ratings
- Attractions and amenities
- Walk Score
- Public transportation
- Overall condition of the area
However, conducting market research manually before buying a multi family home can be very time consuming and frustrating. Mashvisor’s real estate heatmap is a great tool for neighborhood analysis. It allows real estate investors to identify the neighborhoods with the lowest listing prices and the highest rental income, cash on cash returns, and occupancy rate. You’ll also be able to find a suitable neighborhood based on your rental strategy of choice- traditional or Airbnb rental strategy.
Related: Real Estate Investing for Beginners: A Guide to Neighborhood Analysis
Mashvisor’s Neighborhood Analytics also offers an effective way of researching an area. When you click on a neighborhood’s name, you will be directed to a page with extensive details about that area. This includes stats such as median price, cash on cash return, occupancy rate, optimal rental strategy, and cap rate.
Once you identify a good neighborhood (and if you sign up for an Expert Plan with Mashvisor), you’ll be able to set a filter to view the multi family homes for sale in that neighborhood.
2. Narrow down your list of investment properties for sale
You can now use Mashvior’s investment property calculator to conduct a multi family real estate investment analysis of the different properties in the area. The three main calculations provided by this tool are cash flow, cash on cash return, and cap rate for multi family homes. Based on real estate comps, the investment property calculator will also provide estimates of rental income and expenses for specific rental properties. Both beginner and experienced real estate investors will find this tool very useful.
Start your 7-day free trial with Mashvisor and subscribe to our services with a 20% discount after.
3. Find a mortgage lender and acquire a pre-approval letter
As mentioned earlier, financing a multi family property is relatively easy. You can get a loan from a bank, credit union or private lender. When choosing a lender, consider the following factors:
- Terms – Some loans offer short terms of as little as 5 years, while others offer long terms of up to 30 years.
- Interest rates – Choose a lender with the most competitive interest rates for buying a multi family home.
- Areas covered – Find out if the lender can finance properties in your state.
- Property conditions accepted – If you are planning to buy distressed multi family property, check if the lender offers rehab loans.
- Customer service – The lender should be easily accessible via chat, phone or email.
Once you have identified a lender with reasonable multi family mortgage loan requirements, you will need to submit some information in order to get pre-approved. This includes:
- Your credit score
- Employment history
- 2 years of pay stubs or tax returns
- 2 to 3 months of bank statements
If your application is approved, the lender will give you a pre-approval letter that shows how much you qualify for. This letter will be very important when making an offer on a property.
4. Inspect the multi family property
Before buying a multi family home, you need to conduct a thorough inspection of the fourplex, triplex or duplexes for sale. Hire a professional home inspector to check the condition of the home’s structure, foundation, heating and air systems, windows, floors, ceilings, doors, roof, plumbing, and electrical wiring. You might also want to have additional inspections for mold, radon or pests. If the inspection report reveals major problems, you could negotiate for a lower selling price or ask the seller to repair them at his/her cost.
Related: The Ultimate Property Inspection Checklist for Real Estate Investors
5. Make an offer and close
When making an offer, work with an experienced real estate agent. They will help you negotiate a price that is within your budget. Once the seller accepts the offer, it is time to close the sale. The real estate agent will set a closing date that works for all parties involved. The actual closing is held at the title company and takes 60 to 90 minutes. You and the seller will sign some paperwork and you will get the keys to your new multi family home.
Conclusion
Though buying multi family homes for investment is usually a very time consuming and stressful process, it can be very profitable when done correctly. All you need is the best investment property search tools to find multi family real estate and a good multi family investment calculator to identify the best rental properties available in your area of choice.
Ready to start your journey of buying a multi family home? Click here.